Amid stifled demand, the government pitched in to boost the economy. This helped record gross domestic product (GDP) growth of 5.5 per cent in the quarter ended June, compared with analysts’ estimates of sub-5.3 per cent (GDP growth in the quarter ended March was 5.3 per cent).
However, this also widened the fiscal deficit to 8.1 per cent of quarterly GDP in the quarter ended June.
Choosing between boosting GDP growth and reining in fiscal deficit may seem difficult. However, a break-up of the fiscal deficit shows there is scope to boost development activities, which in turn would boost economic activity. At the same time, the fiscal deficit would be reined in, provided the government took some tough decisions.
The issue is significant, as the Vijay Kelkar panel has given its report on fiscal consolidation to the government.
In the quarter ended June, there was no turnaround in demand in the economy. In fact, private final consumption expenditure rose just 3.97 per cent, against 6.12 per cent in the previous quarter and 14.86 per cent in the year-ago period. This forced the government to boost demand, with government final consumption expenditure rising nine per cent, against 4.3 per cent in the previous quarter and 4.89 per cent in the corresponding period last year.
This led to community, social and personal services rising 7.9 per cent in the quarter, against just 3.2 per cent in the corresponding period last year.
It was here that the break-up of government expenditure was significant, analysts said. Plan expenditure, vital for boosting GDP growth, was well under control, while non-Plan expenditure in the quarter rose more than in the year-ago period, with Budget estimates as the yardstick.
In the quarter ended June, non-Plan expenditure, comprising subsidies and interest payments, stood at Rs 2.25 lakh crore, which accounted for 23.2 per cent of the Budget estimate of 9.69 lakh crore. This was more than 21.7 per cent compared to the year-ago period.
While the rise in non-Plan expenditure compared to the Budget estimate in the quarter ended June did not seem much higher than in the year-ago period, it should be noted the fiscal deficit rose about a percentage point to more than 5.7 per cent of GDP in 2011-12, against the Budget estimate of 4.6 per cent.
In the June quarter, Plan expenditure stood at Rs 86,221 crore, or 16.5 per cent of the estimated Rs 5.21 lakh crore under this head for the entire 2012-13. In the year-ago period, Plan expenditure stood at 19.1 per cent of the estimated amount for 2011-12.
The government, therefore, had the leeway to raise Plan expenditure and boost GDP growth, while curtailing non-Plan expenditure like subsidies, analysts said. “Subsidies will not lead to a rise in GDP growth. This could be curtailed. On the other hand, if you spend on development activities, it would bolster economic growth,” said CARE Ratings chief economist Madan Sabnavis.
Consider, for instance, oil subsidies. The government has already exhausted the Budget estimate of Rs 43,580 crore for this financial year. If oil prices are not raised, oil companies may ask for an additionalRs 1 lakh crore of subsidies during the remainder of this financial year. Analysts said the government would have to take a political decision on raising or de-controlling diesel prices.
Data on the fiscal deficit for the first four months is already available, while GDP data is available for only the quarter ended June. In the April-July period, fiscal deficit stood at Rs 2.64 lakh crore, or 51.5 per cent of the estimated figure under this head for 2012-13.
If the trend continues, the fiscal deficit target would be exceeded by November. This, however, is a simplistic assumption, since proceeds from disinvestment and the sale of telecom spectrum are estimated to fetch the government Rs 70,000 crore.
Yesterday, Finance Minister P Chidambaram had said though the applicable tax rate for companies was 30 per cent, the average tax rate for these stood at about 24 per cent.
If the finance minister succeeds in ensuring an average tax rate of even 26 per cent, the exchequer would collect about an additional Rs 30,000 crore this year.
Therefore, the fiscal deficit for 2012-13 would depend on various factors. But analysts are sure the government would not be able to rein in the deficit to the targeted 5.1 per cent of GDP.
This is likely to be indicated at the mid-term analysis of the economy, expected to be tabled in the next session of Parliament.
